4 Safe Dividend Growth ETFs & Stocks for a Faltering Market

With investors puzzled about the future course of stock market momentum given the rising rate worries, investors must be wondering where to park their money. With a spike in yield, chances are high that both equities and bonds will lose their value.

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Goldman Sachs has already forecast that stocks may nosedive 25% if 10-year bond yields hit a high of 4.5% and a more than 95% probability of a Fed rate hike in March. A senior portfolio manager at Sit predicts that the Fed will raise rates four times this year, one more than what has been penciled so far by the central bank.

While rising rates will lower the price of bonds, fears of faster ceases in cheap money inflows will likely hurt stocks. Against this scenario, some safe or value picks are necessary.

BofA stock strategist noted that “while we do not see a set level at which interest rates have begun to hurt equities, we may be getting closer to exiting the “sweet spot.” The strategist also indicated that “historically, the probability of loss for the S&P 500 increases when the 10-year Treasury yield rises above 3%.”

With the benchmark Treasury yield hitting a high of 2.94% this month and currently at 2.86% as on Feb 26, 2018, a 3%-yield is not a far behind. So, let’s find what could be safer stock investing options right now.

Target Dividend Aristocrats

Dividend-paying securities can be steady sources of current income for investors when returns from equity markets are at risk. But as per the analysis from Bank of America Merrill Lynch, both high-yield and no-yield can get hurt in a rising rate environment.

So, it is better to tap “companies with modest yields and plenty of potential to grow their payments. Typically, dividend growers trade at a 20% premium to high yielders, but right now the growers are slightly cheaper,” per Bank of America Merrill Lynch.

Dividend aristocrats are the blue-chip dividend-paying companies, which have a long history of raising dividend payments year over year. These provide hedge against economic uncertainty and are high-quality in nature.

Further, many U.S. companies hoard a pile cash on their balance sheets and are likely to increase their dividend payouts, especially given the passing of the tax reform. The Trump administration proposed a move from the current worldwide tax system to a territorial system, allowing companies to send their offshore profits back to the United States without extra taxes.

Investors are expecting tax savings to result in fatter and faster dividend hikes and more stock buybacks. Morgan Stanley’s analysts predict that 43% of the total tax savings will go to dividends and buybacks.

ETF Picks

Following, we highlight four ETFs that comprise stocks with a long history of increasing dividends.

In the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) the underlying S&P 500 Dividend Aristocrats Index picks companies that are currently members of the S&P 500 and have increased dividend payments each year for at least 25 years.

We screened stocks on the basis of Zacks Rank #1 (Strong Buy), VGM Score of A or B and a 5-year historical dividend growth rate of at least 20%.

KapStone Paper and Packaging Corporation (NYSE:KS) operates businesses in the paper, packaging, forest products and related industries. The Zacks Industry Rank is in the top 19% and VGM Score of A. Its five-year historical dividend growth rate is 32.9%.